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Thursday, February 23, 2006

Sharekhan Investor's Eye

JK Cement
Cluster: Cannonball
Recommendation: Buy
Price target: Rs225
Current market price: Rs170

Price target revised to Rs225

Key highlights

  • JK Cement, one of the leading cement producers in north India, is proactively expanding its capacity of grey cement from 3.5 million tonne per annum (mtpa) to 4mtpa and the capacity of white cement from 0.3mtpa to 0.4mtpa. We believe this is in line with the demand surge in the northern region.
  • One of the hindrances to JK Cement’s growth has been its high power cost, which stood at Rs780 per tonne in FY2005. However, the company’s plans to set up a 20-megawatt (MW) captive thermal power plant and a 13.2MW waste heat recovery system should lower the cost of power. Moreover, a 6MW captive power plant (CPP) is also planned to be set up at the Gotan facility. The company would be able to generate electricity at a much lower cost that should lead to annual savings of Rs70 crore.
  • Amongst its peers JK Cement has the highest leverage to cement prices, ie in a scenario of rising cement prices the company would register the highest growth in its earnings before interest, depreciation, tax and amortisation (EBIDTA) as compared to its peers.
  • At the current market price (CMP) of Rs170 the stock is discounting its FY2007E (diluted) earnings by 23.6x and its FY2008 earnings by 11.4x. The stock is trading at an enterprise value (EV)/tonne of US$72 on its FY2008 capacity (after factoring in the equity dilution on account of the public issue). We believe the valuations are attractive and do not factor in the huge earnings growth (earnings to grow at a compounded annual growth rate of 113% over FY2006-08) and JK Cement’s transformation to a very cost efficient cement producer. We maintain our Buy recommendation on the stock with a revised price target of Rs225.